Advantages of Franchising

The biggest advantage of franchising appears to be the reduction of risk you will be taking for your investment. This is because franchises typically get up and running faster, and are profitable more quickly. This can be a result of better management as well as a well-known name. According to the Small Business Administration (SBA), most small businesses fail because of weak management. It is in this area that the franchising option shines the most. When you lease a franchise, you are leasing that managerial know-how.

You also usually get better deals on supplies because the franchise company can purchase goods and supplies in bulk for the entire chain, and then pass that savings on to you and the other franchise units.

The often instant recognition from customers is also a big plus. Customers are dealing with a "known" rather than an "unknown." Think about it: If you are driving through a town you've never visited before and have the choice of a "Billy Bob's Fried Chicken" or a "Kentucky Fried Chicken," which one are you more likely to stop at? Until you know that Billy Bob's is THE place for fried chicken, you may not want to take the chance.

For the customer, the advantages of a franchise include the comfort of knowing what you're getting. You know that the quality of the product or service at one location will be comparable to that of another location. You know what they have and you already know what you like about it. The questions for you as a potential franchisee are: Are you looking for something that is uniquely yours? Or do you simply want to run the show, regardless if it's by someone else's rules?

Before you answer those questions, let's go into a little more detail about how the franchise actually works.

The Rules

There are two groups involved in a franchise, the franchisor (the person or company leasing the rights to the business name and system) and the franchisee (the person who purchases it).

The right to the franchise is sold by the franchisor to the franchisee for an initial sum of money, often called the up-front entry fee, or franchise fee. This money will be paid once the contract has been signed. The contract (franchise agreement) details the responsibilities of both the franchisor and the franchisee, and is usually for a specific length of time (typically several years). Once the contract expires, it must be renewed. State laws often have an impact on the options for this renewal.

This initial franchise fee doesn't include anything except the rights to use the name and system, and sometimes training, procedures, manuals, and other assistance like site selection. It doesn't include any of the necessary inventory, fixtures, furniture or real estate.

In addition to the franchise fee, the franchisee must pay the franchisor royalty fees, or other on-going payments. These payments are usually taken as a percentage of sales, but can also be set up as a fixed amount or on a sliding scale. The terms of these fees will be spelled out in the franchise agreement. These payments are for the on-going services and support that the franchisor provides. Franchisors may also sell supplies directly to their franchisees.

Advertising funds are also paid periodically. These funds are usually put into a general account and used for national and regional promotion for the entire chain.

Date: 2015-12-18; view: 661